New South Wales Supreme Court CITATION : In the matter of SSET Construction Pty Ltd (in liq) - Sims v Khattar [2010] NSWSC 102 HEARING DATE(S) : 4, 10 December 2009 JUDGMENT DATE : 23 February 2010 JURISDICTION : Equity JUDGMENT OF : Austin J 1. Declaration that each defendant contravened s 588G(2) of the Corporations Act 2001 (Cth) by failing to prevent the Company from incurring debts in the sum of $563,821 in the period from 1 July 2005 to 30 January 2006. DECISION : 2. Declaration pursuant to s 588M(2) of the Corporations Act that the first plaintiff is entitled to recover from each defendant, as a debt due to the Company, the loss or damage suffered by the creditors whose debts are referred to in Order 1, being the amount of the debts less any gross recovery of assets of the Company but without regard to any statutory recoveries that he has made, and that the defendants are jointly and severally liable to pay the amount so calculated. 3. Order the defendants to pay the first plaintiff the amount calculated in accordance with Order 2, namely $507,439. 4. Order defendants to pay plaintiffs' costs of the proceedings, as agreed or assessed. CATCHWORDS : CORPORATIONS - insolvent trading - liability of directors - presumed insolvency arising from failure to keep and retain financial records - actual insolvency arising from deficiency of working capital - whether reasonable grounds for suspecting insolvency - whether directors aware of such grounds - whether a reasonable person in like position in a company in the company's circumstances would be so aware - when debts were incurred LEGISLATION CITED : Corporations Act 2001 (Cth), ss 9, 513A, 588E, 588G, 588M Anthony Milton Sims in his capacity as liquidator of SSET Construction Pty Ltd (in liq) (First Plaintiff) SSET Construction Pty Ltd (in liq) (Second Plaintiff) PARTIES : Simon Khattar (First Defendant) Edmond Khattar (Second Defendant) Tony Khattar (Third Defendant) FILE NUMBER(S) : SC 2008/00278617 COUNSEL : R D Marshall with L McBride (Plaintiffs) A Fernon (Defendants) SOLICITORS : Bowles Lawyers (Plaintiffs) Yates Beaggi Lawyers (Defendants) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EQUITY LIST AUSTIN J TUESDAY 23 FEBRUARY 2010 2008/00278617 IN THE MATTER OF SSET CONSTRUCTION PTY LTD (IN LIQ) – SIMS V KHATTAR JUDGMENT 1 HIS HONOUR: These are insolvent trading proceedings brought by Mr Sims as liquidator of SSET Construction Pty Ltd (in liq) ("the Company"). By amended originating process filed on 12 May 2009, Mr Sims seeks the following orders: a declaration that each of the three defendants contravened s 588G(2) of the Corporations Act 2001 (Cth) by failing to prevent the Company from incurring debts of $3,064,702.68 ("the first amount"), or in the alternative $1,457,760 ("the second amount"); a declaration pursuant to s 588M(2) that he may recover from the defendants, as a debt due to the Company, the first amount, or in the alternative the second amount, less any gross recovery of assets of the Company but without regard to any statutory recoveries that he has made; and an order that the defendants pay the plaintiffs the amount so declared. The first amount is the amount of debts alleged by Mr Sims to have been incurred from 30 January 1999 to the date of his appointment as liquidator, that remain unpaid. The second amount is the amount of debts incurred on and after 1 July 2005 and alleged to remain unpaid. In final submissions these figures were revised 2 The three defendants are directors of the Company. Mr Sims was appointed liquidator of the Company on 30 January 2006 by order of this Court in proceedings No 3859 of 2005. 3 By amended points of claim filed on 12 May 2009, Mr Sims alleges that the Company was insolvent within the meaning of s 95A of the Corporations Act on and from 30 January 1999, or in the alternative, on and from 30 June 2005. The particulars given for this allegation are as follows: (a) the Company failed to keep financial records for the period 30 January 1999 to 30 January 2006, as required by s 286(1) of the Corporations Act and its predecessor legislation; (b) the Company failed to retain all the financial records created by it in that period, as required by s 286(2); (c) in the alternative, the Company had a deficiency of working capital in an amount of at least $497,014.96 as at 30 June 2005 and is presumed insolvent from that date pursuant to s 588E(3) of the Corporations Act. 4 The amended points of claim also allege that on and from 30 January 1999: there were reasonable grounds for suspecting that the Company was insolvent; each of the three defendants was aware that there were such reasonable grounds; the Company incurred debts that have not been paid; the debts are unsecured; the creditors whose debts have not been paid have suffered loss and damage because of the Company's insolvency. 5 By points of defence filed on 22 October 2008, the defendants admit their directorships and that the debts claimed are unsecured, but everything else is put in issue. In final submissions, counsel for the defendants concentrated on showing that the liquidator had made fundamental mistakes in calculating the financial position of the Company at critically important dates including 30 June 2005; and that some of the liquidator's calculations as at 30 June 2005 were based on information that came to the liquidator subsequently and therefore could not have been known by the directors at that date, so that the ingredient for liability expressed in s 588G(2)(a) or (b) is not satisfied. In final submissions the defendants did not purport to rely on any of the defences to liability for insolvent trading found in s 588H, although the points of defence (para 11) suggest reliance on the defensive s 588H(2). 1. Background facts 6 The Company was registered in January 1992, when Simon and Edmond Khattar were appointed directors. Tony Khattar was appointed a director in May 1995. They have remained directors at all relevant times since their respective appointments. Tony is a licensed plumber and acted as the Company's site supervisor. Edmond is a licensed builder and acted as project manager. Simon is an accountant and had the task of finance and administration. 7 The evidence reveals that there are some related entities of the Company: Compass Plumbing Services Pty Ltd, whose directors are Simon, Tony and Edmond Khattar; and Unitcorp Pty Ltd, whose sole director is Simon Khattar. 8 The Company began to carry on business as a builder/contractor in 1995. It commenced building work on a property in 13 Lagoon Street Narrabeen in 1998. During the period from 2000 to 2005 it was head contractor on residential unit building jobs as follows: 66-70 Constitution Rd, Meadowbank, for 22 units; 72-78 Constitution Rd, Meadowbank (owner Compass Plumbing Services Pty Ltd) for 34 units; 1-5 Kitchener Avenue, Regents Park, for 21 units; 7-11 Kitchener Avenue, Regents Park, for 24 units; 2-8 Kitchener Avenue, Regents Park, for 25 units. According to the liquidator's evidence, the majority of outstanding creditors of the Company at the date of the liquidator's appointment appear to be related to construction work on the Company's building sites in Kitchener Avenue, Regents Park. The Company's business activities ceased immediately following the appointment of the liquidator on 30 January 2006. 9 A dispute developed between the Company and the Owners Corporation Strata Plan 57653 ("Owners Corporation") over allegedly defective works undertaken by the Company at the Lagoon Street Narrabeen property. On 12 May 2005 the Consumer, Trader & Tenancy Tribunal ordered the Company to pay the Owners Corporation the sum of $152,912.10 on or before 14 June 2005. On 7 July 2005 the Owners Corporation instituted proceedings in this Court for the winding up of the company. The debt was eventually paid, well after the making of the winding up order, by the Home Warranty Insurer, Vero Insurance Ltd, which has proved against the Company to assert its right of obligation. 2. The liquidator's case 10 It is admitted that the defendants were directors of the Company at all relevant times (s 588G(1)(a)), that the debts identified in Mr Sims' claim were unsecured (s 588M(1)(c)), and (of course) that the Company is being wound up (s 588M(1)(b)). In those circumstances, the following elements of liability under ss 588G and 588M are in contention: (a) whether the Company was insolvent at the time when it occurred the debts that are the subject of the claim, or became insolvent by incurring them (s 588G(1)(b)); (b) whether, at the time each debt was incurred, there were reasonable grounds to suspect that the Company was insolvent or that it would become insolvent by incurring the debt (s 588G(1)(c)); (c) whether the defendants were each aware at the time of the incurring of the debts that there were such grounds for so suspecting, or a reasonable person in a like position in a company in the Company's circumstances would be so aware (s 588G(2). 11 I shall call these matters elements (a), (b) and (c) respectively. If these elements are proven, Mr Sims is entitled to recover from each defendant, as a debt due to the Company, an amount equal to the amount of the loss or damage suffered by each creditor whose debt was incurred after the three elements were satisfied. 12 To establish his case, Mr Sims sought at the hearing to show that the three contested elements of liability were established at a specified time, and to prove that the defendants failed to prevent the Company from incurring specified debts after that time. 3. Element (a) - the Company's insolvency 13 For the purposes of proceedings under ss 588G and 588M, solvency and insolvency are defined in s 95A. A person is solvent if, and only if, the person is able to pay all of the person's debts as and when they become due and payable; and a person who is not solvent is insolvent. 14 Mr Sims seeks to prove insolvency in two ways: first, by relying on certain presumptions of insolvency under s 588E, and second, by establishing insolvency in fact. 15 Mr Sims relies on two of the presumptions found in s 588E. These presumptions operate for the purposes of the present proceedings, except so far as the contrary is proved (s 588E(9)). 16 First, s 588E(4) provides that if it is proved that a company: (a) has failed to keep financial records in relation to a period as required by s 286(1); or (b) has failed to retain financial records in relation to a period for the 7 years required by subsection 286(2), then the company is presumed to have been insolvent throughout the period. Mr Sims seeks to rely on both limbs of s 588E(4). 17 There are some exceptions to that presumption (ss 588E(5)-(7)). Subsection (7) is clearly not relevant to the present case. Subsection (5), according to which the presumption does not arise in relation to a contravention of s 286(1) that is only minor or technical, has been the subject of submissions and I shall return to it under heading 3.1.1. I shall address subsection (6) under heading 3.1.3 below. 18 Second, s 588E(3) applies where a company is being wound up, and it is proved or because of s 588E(4) (inter alia) it must be presumed, that the company was insolvent at a particular time during the 12 months ending on the relation-back date. In those circumstances it must be presumed that the company was insolvent throughout the period beginning at that time and ending on that day. 3.1 Failure to keep financial records 19 Subsections 286(1) and (2) provide as follows: "(1) A company … must keep written financial records that: (a) correctly record and explain its transactions and financial position and performance; and (b) would enable true and fair financial statements to be prepared and audited. The obligation to keep financial records of transactions extends to transactions undertaken as trustee. (2) The financial records must be retained for 7 years after the transactions covered by the records are completed." 20 Scott Pascoe, a partner in Mr Sims' firm who has the carriage of the SSET Construction matter, prepared a report entitled "Liquidator's Evidence as to Solvency" dated 16 February 2009 ("Mr Pascoe's Report"), which is in evidence, together with its many appendices. He made the following statements in support of the liquidator's claim that the Company failed to comply with ss 286(1) and (2): "6.15 From my experience, I would expect a company of the size and type of SSET to have maintained the following books and records: Constructions plans, correspondence, building approvals, quantity surveying reports, and other construction project related materials; Complete invoicing of clients, including progress payment claims; Quotations for performance of work; Building contracts for each project undertaken; Purchase orders for provision of goods and services; Deposit and receipt books; Creditors invoices and statements; Cheque butts with detailed descriptions of the payee, purpose, date and amount of payments; Complete payroll records, including copies of group certificates, employee declarations and the like; and Complete bank statements and details of internet banking transactions; Legal and land titles documents relating to acquisition and disposal real estate by the company. 6.16 The above books and records could allow cash books and general ledgers to be prepared to enable true and fair financial statements to be prepared and audited. 6.17 If the director's claims as to corrupted computer files, alleged delivery of records to the Liquidator and the records with Nemes are assumed to be correct, the records would still not comply with Section 286 of the Act. I come to this conclusion given that the cash transactions would make it impossible for the written financial records to correctly record and explain the Company's financial position and performance and allow for true and fair financial accounts to be audited." 21 Mr Sims relies on the Report and contends that the evidence shows failure to comply with both subsections of s 286. The submissions made on his behalf address the following evidentiary matters: cash receipts from tenants and loans and cash payments to creditors; misleading recording of cash payments as if made to creditors; missing books and records. I shall deal with each of these matters in turn, incorporating the responses made on behalf of the defendants. 3.1.1 Cash receipts from tenants and loans and cash payments to creditors 22 According to the submissions made on behalf of Mr Sims, the evidence shows that the Company paid suppliers who did not render tax invoices and whose transactions were not recorded by the Company in its books. Mr Sims relies on six evidentiary matters, arising out of evidence given by Simon and Tony Khattar before Hammerschlag J in equity proceedings in this Court, and by Simon Khattar in examinations conducted on behalf of the liquidator. 23 First, on 5 February 2008 Tony Khattar gave evidence before Hammerschlag J under cross-examination, to the effect that the Company sometimes paid subcontractors in cash without obtaining tax invoices and he was unaware whether and how those transactions were recorded. The evidence is as follows: Question : From time to time did you pay or arrange to have paid subcontractors who worked for the company, arrange to have them paid, even when they did not submit a tax invoice? Answer : Yes, because at times people ask for cash which we have an agreement with, we pay cash. Question : Do you know whether all these sorts of payments were recorded in the payments of the company? Answer : I would not know. Question : is that something Simon would know? Answer : I would say so. 24 In my opinion this evidence, considered in isolation, is insufficient to give rise to a presumption of insolvency. It does not amount to an admission that the Company failed to keep or retain financial records for the purposes of the Corporations Act (Mr Khattar said he would not know whether cash payments were recorded), and even if it did, the evidence does not identify failure to keep or retain records "in relation to a period" as is necessary for the presumption under s 588E(4) to arise. 25 Second, Simon Khattar gave evidence under cross-examination before Hammerschlag J to the effect that in the building industry, you have to operate business at two levels, a level where things are recorded and a cash level. He said there are records of some of the Company's transactions involving cash. The evidence is as follows: Question : What happened, sir, is that you seem to have been operating on your case, a company on two levels: on a level where things were recorded in the books of accounts and bank account; and also on a level, alternative level, on a cash level, would you agree with that? Were things only done in cash and were not represented by any books of the company? Answer : In the building industry you have to operate under those levels. Question : So, you agree with what I have just said, is that right? Is that what you were doing with this company? Answer : To a certain extent, yes. Question : And there are no records of any transactions involving cash, is that right? Answer : No, there are records of some transactions involving cash. Question : Well, the general run of things was, if you had some cash it would not go into the bank account? Answer : That is right. 26 This evidence also falls short of establishing a presumption of insolvency, when considered in isolation. There is an admission that some cash payments were not recorded, and therefore to that extent there was a failure to keep financial records, but the evidence does not relate that failure to a "period", as required to the presumption in s 588E(4) to arise. 27 Third, some indication of the extent to which cash transactions were not recorded comes from the evidence given by Simon Khattar before Hammerschlag J. One of the matters before Hammerschlag J was to assess loans claims by Tony Khattar and Georgina Dimitriou against the Company. In that context, Simon Khattar gave the following evidence: Question : But, sir, on your story, with the cash alternative economy run by the company, the accounts would never have helped you with respect to Tony or Georgina's outstandings, is that not right? Answer : Yes. 28 In my opinion this evidence is too vague and general to provide a foundation for the presumption of insolvency. 29 Fourth, in the liquidator's examinations Simon Khattar gave evidence about the way the Company handled cash receipts during the period 2000-2006. His evidence indicates that the Company received cash receipts from tenants and for cash jobs, and when it did so, the cash was not paid into the Company's cheque account but instead it was used to pay bills, although he claimed that this was reflected in journal entries made by him. The evidence is as follows: Question : Did all the receipts of the company go into that cheque account? Answer : Yes. Question : Even cash receipts? Answer : No. Question : Where did the cash receipts go? Answer : Went to pay bills. Question : How were they reflected in the books of the company? Answer : By way of journal. Question : And who did those journals? Answer : I did. Question : Did you issue receipts for cash received? Answer : No. Question : On what account was cash received by the company in the years 2000 to 2006? Answer : I am sorry? Question : For what reason or for what purpose was cash received by the company in the years 2000 to 2006? Answer : It would be for rent. Question : Yes? Answer : It would be for cash jobs if there were any. Question : Were there any? Answer : Just a few and that is it. Question : The company had tenants? Answer : The company had, yes. Question : Who were the tenants in the years 2000 to 2006? Answer : We had Dimitriou & Associates, Rooftop Conveyancing and we had tenants at Narrabeen. 30 Particulars of the Company's tenancies were given in the Report as to Affairs ("RATA") which was signed by each of the defendants. It appears that there were commercial tenancies to Rooftop Conveyancing and Dimitriou & Associates Pty Ltd at 174 Woodburn Rd, Berala. Rooftop Conveyancing was evidently run by the defendants' sister. There were residential tenancies at 10/13 Lagoon St, Narrabeen. 31 This is not, in my view, reliable evidence of any particular failure to comply with s 286. Mr Khattar said he recorded the cash transactions by journal entry. Further, although the period from 2000 to 2006 was mentioned, it is not clear to me that Mr Khattar's evidence was that there was a failure to keep proper financial records of cash transactions throughout each accounting period over that time. 32 Fifth, Simon Khattar gave other evidence a little later in the liquidator's examination, which appears to be inconsistent with his claim that cash transactions were recorded by journal entry. The evidence is: Question : Well, is it the case that all cash receipts are not recorded in the financial accounts of the company? Answer : Yes. 33 This evidence does not relate to any particular period, and might be evidence of minor failures to keep records, exempted from the presumption by s 588E(5). 34 Sixth, Tony Khattar gave evidence before Hammerschlag J to the effect that cash was obtained from the directors from time to time. He said: "Sometimes we may be running short of money. That was when we all chipped in and helped pay those contractors". 35 That evidence is not directed to any failure to keep or retain financial records of the Company. 36 Counsel for Mr Sims submitted that this evidence proves that: (a) during the period 2000 to 2006 cash was received which was not recorded in the Company's books, from rents from the two commercial tenants and the residential tenancies; and (b) some subcontractors were paid in cash without rendering tax invoices to the Company and without having those payments recorded in the books of the Company. These cash payments derived from the cash receipts of the Company and also from cash loans made by the directors. 37 I agree that the evidence I have set out, if accepted, would establish these propositions. But care must be taken by the Court in evaluating evidence given in general terms and not supported by documents, especially when the evidence is given in other proceedings for a different purpose. I am not satisfied that the evidence, when considered in combination, is any stronger than each of the passages of evidence I have set out. For the reasons I have given concerning each passage of evidence, I am not satisfied that the evidence considered separately or in combination proves one or more specific failures to keep or retain financial records in relation to a specific period; though there are some indications of failure to keep financial records that might, consistently with the evidence, have been minor. 38 The result is that in my view, the presumption of insolvency under s 588E(4) has not arisen by virtue of that evidence. 3.1.2 Misleading recording of cash payments as if made to creditors 39 Mr Sims alleges that during the period from May to Christmas 2005, a series of cheques were drawn on the Company's bank account for an amount of at least $20,000 in each case, and those cheques were cashed at the bank in the cash was then handed over. He alleges that the cheques were entered into the Company's cash book, where each payment made was misleadingly described as being paid to a legitimate creditor. In this way, according to Mr Sims, an amount of over $300,000 was paid by the Company in cash from May to Christmas 2005. There are some suggestions in the evidence that the payments were made in response to extortion threats, but that is not a matter on which I need to make any finding. 40 Mr Sims relies on the following evidence given by Simon Khattar in the Supreme Court proceedings before Hammerschlag J: Question : Now what we have seen sir is that there was a process of cash cheques being written on the company's bank account in large generally rounded amounts of money? Answer : Yes. Question : And in that way an amount of in excess of about $300,000 was taken out of the company's accounts, is that right? Answer : That's right. Question : And that money did not get paid to the creditors of the company, did it, in terms of trade creditors for valid claims? Answer : Not to the trade creditors of the company, no. 41 This evidence is quite unspecific in itself, but there is documentary evidence that supports it. The evidence given by Simon Khattar before Hammerschlag J, together with the documentary evidence obtained by Mr Sims and tendered, establishes in my view that the following cash withdrawals have occurred: on 2 September 2005, $30,000 was withdrawn (cheque No 2850), recorded as paid to Classic Lining (gyprockers); on 9 September 2005, $30,000 was withdrawn (cheque No 2860), recorded as paid to Classic Lining; on 23 September 2005, $40,000 was withdrawn (cheque No 2867), recorded as paid to Apollo Plumbing; on 9 November 2005, $40,000 was withdrawn (cheque No 2919), recorded as paid to Ostasheen Pty Ltd; on 25 November 2005, $40,150 was withdrawn (cheque No 2923), recorded as paid to Concrite. The total of these amounts is $180,150. In each of these cases the cash book records the payment and the supposed creditor, and Mr Khattar's evidence is that the money was withdrawn in cash and not paid to that creditor. 42 Mr Sims submits that there were two other payments of the same kind: on 9 August 2005, $20,000 was withdrawn (cheque No 2808), recorded as paid to Derek's Forklift; on 31 August 2005, $50,000 was withdrawn (cheque No 2828), recorded as paid to Concrite. 43 These were not admitted by Simon Khattar in evidence, but Mr Khattar accepted that payments were made in the period beginning in May, and that the total was over $300,000. The accounts provided in support of the proofs of debt submitted by Derek's Forklift and Concrite showed no amount received as recorded in the respective cheques (Nos 2808 and 2828). And Concrite was admitted to have been used as a "dummy" creditor for the later transaction on 25 November 2005. Putting those considerations together, it seems to me on balance that these last two transactions were in the same category as the first five set out above. Consequently the total amount proven is $250,150. 44 I agree with the submission made by counsel on behalf of Mr Sims that the creditors named in the cash book for these transactions have been shown not to have been paid as recorded in the cash book, and there is nothing to suggest there were any other financial records of the Company that would have explained what actually occurred. Consequently, the Company's financial records did not correctly record and explain these transactions, and true and fair financial statements could not be prepared and audited from the Company's records. Having regard to the amounts involved and the nature of the misleading records, the contraventions are certainly not minor or technical. Therefore a presumption of insolvency arises under s 588E(4), from no later than the date of the first transaction that has been proven, namely 9 August 2005. 45 Mr Sims urged the Court to find that the presumption began in May 2005, since Simon Khattar's evidence indicated that more than $300,000 had been paid away in the period from May to Christmas 2005 in the series of transactions of which the proven transactions formed part, indicating that there were other transactions during that period amounting to about another $50,000. I do not accept that submission, because Mr Khattar's reference to a period beginning in May 2005 does not adequately specify a period in relation to which there was a failure to keep financial records in the manner described. There is a period more specifically identified in the evidence, namely the period beginning on 9 August 2005 and ending on 25 November 2005. The presumption of insolvency arises in respect of that period, and under s 588E(3) it is therefore to be presumed that the Company was insolvent throughout the period from 9 August 2005 until the relation-back day, which in this case appears to be 30 January 2006 (see definition of "relation-back day" in s 9, and s 513A(e)). 3.1.3 Missing books and records 46 Under s 286(2) the "financial records" of a company must be retained for 7 years. "Financial records" are defined in s 9 of the Corporations Act to include: (a) invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers; (b) documents of prime entry; and (c) working papers and other documents needed to explain: (i) the methods by which financial statements are made up; and (ii) adjustments to be made in preparing financial statements. 47 In the passage quoted above from paras 6.15-6.17 of his Report, Mr Pascoe stipulates the records he would expect to find in the case of a company conducting the kind of business that was carried on by the Company. His explanation reflects the definition of "financial records" in the Act. 48 Mr Sims sent a demand for the delivery books and records to each of the directors of the Company by registered mail on 31 January 2006, together with a request to complete a RATA and a director's questionnaire. Subsequently there was a chain of correspondence together with telephone conversations between representatives of the liquidator, on the one hand, and the directors' lawyers, Simon Khattar and Georgina Dimitriou on the other, in relation to the delivery of records. Georgina Dimitriou is a paralegal clerk and a long-time associate of the directors, who has assisted them in their dealings with the liquidator. By arrangement with Simon Khattar, a member of the liquidator's staff attended the registered office of the Company on 16 February 2006 and was provided with six manila folders of records. As indicated above, the Company constructed five residential unit developments in the period from 2000 to 2005, and so one would expect that there would be many boxes of records delivered up to Mr Sims - much more than six manila folders. 49 The liquidator was provided with a RATA signed by the Company's directors on 8 March 2006. According to Mr Pascoe's evidence, the RATA fails to disclose at least 62 additional creditor claims in the total amount of at least $2.75 million, now known to the liquidator to exist (it is unnecessary for me to make any finding as to be total amount of creditors' claims in the liquidation). 50 In light of this evidence, Mr Sims submits that the vast bulk of the Company's financial records are missing, and consequently the Company has failed to comply with s 286(2) and the presumption of insolvency provided for in s 588E(4)(b) has arisen. 51 The whereabouts of the Company's financial records was explored in the liquidator's examinations and in the Supreme Court proceedings. There are useful summaries of the evidence of Simon Khattar in the final written submissions of the parties, which may be set out in combination (so far as they relate to financial records, as opposed to cash transactions) in the following propositions, which in my view are supported by the evidence: (a) Georgina Dimitriou worked as a paralegal for Peter Nemes, solicitor of Nemes Thomas & Co, until May 2005. She worked on the Company's legal matters. The Company had "court cases happening"; (b) in late 2004 or early 2005 Simon Khattar delivered all of the Company's records to Nemes' office - 40 boxes of them. He used a utility truck to cart them; (c) the records said to be delivered included the Company's invoices, cheque books, tax returns, BAS returns and accountants' working papers; (d) no records were handed over to Nemes after May 2005, as Nemes was not retained after that time; (e) Nemes refused to allow Simon Khattar to take the Company's records, and he has only recovered one file; (f) for the period after May 2005, Simon Khattar says he handed over the Company's documents to Bill Cotter of the liquidator's office (5 manila folders) and posted an envelope containing three manila folders of records addressed to Bill Cotter later in 2006, but the liquidator's evidence is that no documents were received; (g) Simon Khattar does not know the location of any copy of the written building contracts into which the Company entered for its jobs. 52 Georgina Dimitriou also gave evidence in the liquidator's examinations. She said that: she worked at the office of Mr Nemes of Nemes Thomas & Co from approximately 2000 until 7 May 2005; while she was in the employment of Mr Nemes, Simon Khattar delivered 40 or more boxes to Mr Nemes' office, at her request; the boxes contained financial and accounting records, invoices and building records relating to the building activities of the Company, and she reviewed them; when her employment was terminated on 7 May 2005, she and Simon Khattar endeavoured to remove the boxes but they were denied access, and she said the 40 boxes remained at the office of Nemes Thomas & Co. 53 Inconsistently with the evidence of Simon Khattar and Georgina Dimitriou, correspondence from Nemes has denied that the firm held, or continues to hold, any financial records of the Company. Ex D3 at the hearing before me is some correspondence from Nemes Thomas & Co to another firm of solicitors, which contains some comments about a matter between the Company and the Owners Corporation, in which Nemes Thomas & Co were evidently acting for the Company. A schedule to the letter contains the comment that Ms Dimitriou attended the office with the client and directed him where to collect his file and assisted him in removal of the file, and thereafter the only documents that remained in the possession of Nemes Thomas & Co were 18 lever-arch folders that constituted the brief to counsel. Though the defendants endeavoured to make something of this evidence, it seems to me to be unhelpful. The client's "file" was presumably limited to the documents relating to the Owners Corporation, and therefore unlikely to constitute the Company's financial records in relation to all of its projects. The note in the schedule does not indicate that the quantity of material collected as the client file was anything like 40 boxes, and obviously 40 boxes would hold many more than 18 lever-arch folders. 54 Simon Khattar gave evidence in the liquidator's examination that the computer hard drive on which he maintained the accounts of the Company and its related companies, Compass Plumbing and Unitcorp, had become corrupted, but only in relation to those three companies. It appears that he was able to re-input the accounts of Compass Plumbing and Unitcorp but not of the Company. 55 Simon Khattar's evidence, if accepted, would support a finding that the failure to retain financial records for all periods before May 2005 in contravention of s 286(2) commenced no later than about May 2005, when (according to his evidence) Mr Nemes refused to return the 40 boxes of records and consequently it could no longer be said that the company was retaining those records through the agency of Mr Nemes. 56 Simon Khattar's evidence concerning financial records in respect of the period after May 2005 seems to me quite unsatisfactory. Thus, if some documents went astray in the mail, one would have expected a diligent company director to take steps to ensure that duplicate records were obtained or prepared. It seems implausible that, if there was a computer problem, it could be overcome by the re-inputting of data for other companies but not for the Company. Volumes 2-4 of Ex SDP-1 contain invoices, orders and related documents for more than 30 creditors who Mr Sims has identified as having rendered invoices to the Company from May 2005. That is quite a bulky bundle of documents. They were not in the six manila folders handed over to Mr Sims by the directors. They would not have fitted into an envelope for postage. Mr Pascoe's report shows that there were some financial records retained in respect of the period from May 2005 to January 2006, including financial statements and management accounts, but the records are very substantially incomplete. 57 I infer that the Company has failed to retain financial records for all accounting periods up to May 2005, and for the period from May 2005 to January 2006, in contravention of s 286(2). A presumption accordingly would arise in relation to that whole period under s 588E(4)(b), subject to the effect of s 588E(6). 58 Under s 588E(6), the presumption does not arise in relation to a person if it is proved that: (a) the contravention was due solely to someone destroying, concealing or removing financial records of the company; and (b) none of those financial records was destroyed, concealed or removed by the first-mentioned person; and (c) the person was not in any way, by act or omission, directly or indirectly, knowingly or recklessly, concerned in, or party to, destroying, concealing or removing any of those financial records. 59 On the account of Simon Khattar, supported by Ms Dimitriou, Mr Nemes retained a substantial quantity of records of the Company and has refused to return them. If accepted, this evidence would seem to suggest that Mr Nemes has concealed or removed those records, and there is no suggestion that any of the defendants has been concerned in that concealment or removal. There is inconsistent evidence before the Court as to whether Mr Nemes ever received a substantial volume of records of the Company and if he did, whether he has refused to return them. Ex D3 is unhelpful in resolving that inconsistency for reasons given above. Mr Khattar, Ms Dimitriou and Mr Nemes have not given oral evidence in the present proceedings. 60 Subsection (6) is concerned, in its terms, to protect the rights or interests of any person who would be prejudiced if the presumption were to be applied, in circumstances where someone else is (broadly speaking) to blame for the failure to retain a company's records. I think in the present circumstances the correct course is to accept the evidence of Mr Khattar and Ms Dimitriou on this point, with the consequence that subsection (6) applies in respect of all three defendants, and so there is no presumption of insolvency arising out of failure of the Company to retain financial records in respect of the period up to May 2005. 61 However, there is no suggestion in the evidence that subsection (6) has any application in relation to financial records for the period from May 2005 to January 2006. I therefore accept Mr Sims' submission that a presumption of insolvency has arisen as from the beginning of May 2005, by virtue of the Company's failure to retain its financial records for the period beginning at that time and ending on 30 January 2006. I also accept his submission that the defendants have not succeeded in rebutting that presumption. 3.2 Actual insolvency 62 Mr Pascoe expressed the opinion in his Report that, on the basis the Company's net deficiency in working capital, its net assets, and accruing unsecured creditor claims, the Company was unable to satisfy the claims of all of its creditors from at least 30 June 2005. 3.2.1 Mr Pascoe's reconstructed accounts 63 The liquidator has had access to the Company's financial statements to June 2002, June 2004 and June 2005, and tax returns to June 2003 and June 2004. The financial statements were prepared by Simon Khattar. There are management accounts for the months from July to December 2005, which according to Simon Khattar were drafts that were not adopted. Mr Pascoe and his staff have prepared summaries of these documents, though in his Report he is critical of them in various respects including the following: they do not disclose all known assets of the Company such as motor vehicles and shares; the financial statements for the 2004 year do not correspond with the 2004 tax return, or the comparative figures in the 2005 financial statements; the financial statements and management accounts fail to disclose all unsecured trade creditors; the financial statements fail to disclose the accurate amounts owing to related party creditors, especially having regard to the short minutes of orders dated 8 February 2008 in the Supreme Court proceedings; the financial statements do not include cash transactions, as discussed at 3.1.2 above. 64 For the purposes of his Report, Mr Pascoe and his staff prepared a reconstruction of the Company's financial position as at the date of the liquidator's appointment and as at 30 June 2005, based on known information obtained by the liquidator during the liquidation to that time. That has led Mr Pascoe to comment in his Report as follows: (a) total assets appear to be overstated in the Company's financial statements by approximately $600,000 as at 30 June 2005; (b) the Company's financial statements fail to disclose unsecured creditors as at 30 June 2005 by an amount of $457,455; (c) the Company's working capital balance (current assets less current liabilities) is a deficiency of $497,014.96 at 30 June 2005 and a deficiency of $2,755,450.35 at 30 June 2006; (d) the Company's reconstructed net asset position as at 30 June 2005 is a deficiency of $295,110, in contrast with an apparent net position of $559,361 in the Company's financial statements; (e) in the period from July 2005 to January 2006, the Company incurred at least $1,457,760 in additional unsecured creditor claims, which remained unpaid as at the date of the liquidator's appointment (this is the second amount claimed by the liquidator in these proceedings); (f) the Company's reconstructed net asset position as at 30 January 2006 is a deficiency of $2,405,542. 3.2.2 Unsecured creditors at 30 June 2005 65 As to item (b), unsecured creditors as at 30 June 2005, Mr Pascoe expressed the opinion that it is likely that the figure of $457,455 is an underestimate. He pointed out that the liquidator's information was derived from creditor claims that remained outstanding at the date of the winding up order, and so the figure did in not take into account creditors who were repaid between July 2005 and January 2006. 66 Counsel for Mr Sims submitted that the Court could calculate how big an underestimate there was by looking at the figures for the amounts paid by cheque to current creditors in the months immediately following 30 June 2005. The evidence indicates that in the period from 1 July to 31 August 2005 the total amount paid to trade creditors was $427,289.68. The calculations are shown in a document prepared on behalf of Mr Sims on the basis of the evidence, called "Schedule of Cheques Paid to Trade Creditors of SSET After 1 July 2005". Counsel submitted that the Court could treat all of this amount (except for $70,000 representing the two false payments made in August, as discussed at 3.1.2) as debt incurred before 30 June, on the basis that "SSET, like many builders, can be taken not to pay many of its creditors' invoices within 30 or even 60 days". My view is that the whole of the July/August payments should not be attributed to pre-30 June debt, as it is likely that the Company would have found it necessary to pay some creditors on a more timely basis (for example, for hire of necessary equipment that might be repossessed if payment were not made); but a very substantial part of the July/August payments would have been for pre-30 June debt. Therefore I accept that total trade creditors at 30 June 2005 probably stood at over $700,000. 67 In final submissions, counsel for Mr Sims provided the Court with a Schedule of Debts Incurred, which revised the liquidator's figures to produce a total of debts incurred to 30 June 2005 of $750,781.80. Counsel for the defendants submitted (final written submissions, para 23) that some items should be excluded from the list of debts incurred to 30 June 2005. Most of the items objected to by counsel for the defendants have been excluded from the revised list of debtors to 30 June 2005. There are only two items of controversy. 68 One is that the Schedule includes the subrogation claim by Vero Insurance against the Company in the sum of $152,912.10, arising from the successful claim by the Owners Corporation in the Consumer Trader & Tenancy Tribunal, discussed elsewhere in this judgment. The Tribunal made a payment order for that amount on 12 May 2005, ordering payment by 14 June 2005. The defendants' submission is that the Company's liability to Vero Insurance only arose when Vero Insurance, having settled the claim on 29 March 2006, lodged a proof of debt with the Company on 19 April 2006, well after the commencement of the winding up. In my opinion it is correct to include this debt in the list of debts incurred up to 30 June 2005. When the Tribunal made its order on 12 May 2005, both the Company and the home warranty insurer became liable to respond, in circumstances under which the insurer had a right of subrogation against the Company in respect of the insurer's liability. A prudent accountant would enter the liability in the creditors ledger of the Company as at the date of the Tribunal order, in my view, even if at that stage it was not clear whether the Company's liability would be discharged by payment to the Owners Corporation or to Vero Insurance. To remove the amount in question from debts incurred to 30 June 2005 would create a distortion. 69 The other matter relates to $129,699.01 said to be owing to Compass Plumbing, a related entity to the Company, as a debt incurred to 30 June 2005. It appears that in 2007 Compass Plumbing paid invoices dated in the period from December 2004 to October 2005, that had been rendered to the Company by two suppliers, and took an assignment of those debts. The suppliers were Cedar Aluminium & Windows and Prime Marble & Granite. Compass Plumbing then claimed on the Company in liquidation. The defendants say that the claim by Compass Plumbing relates to expenses incurred after the liquidation, but in the Schedule, the liquidator treats the total amount of the original invoices as a debt incurred to 30 June 2005. Once again it seems to me that the liquidator's approach is correct. Although the identity of the creditor has changed after the commencement of liquidation, the debts were originally incurred at the times when they became payable under the contracts between the Company and the original suppliers. Since the goods supplied were likely to have been custom ordered, the probability is that the payment obligations arose prior to 30 June even though the last invoice is dated 13 October 2005 (there is an invoice bearing the date 10 November 2006 but that appears to be a mistake as the Company ceased to trade when the winding up order was made). Since the object of preparing a list of creditors to 30 June 2005 is to obtain an assessment of the level of indebtedness of the company at that time, it would be a distortion to omit these debts. 70 In the result, I accept the liquidator's figure of $750,791.80 for debts incurred to 30 June 2005, as per the Schedule. 71 Behind tab 25 of Vol 4 of Ex SDP-1 there is a table showing the ageing of creditors of the Company, prepared by Mr Pascoe's staff. Unpaid trade creditors up to June 2005 stood at $499,340.47, of which, as at 30 June 2005: $71,746.80 was pre-November 2004; $207,080 was over 90 days; $430,837 was over 30 days. 3.2.3 Working capital 72 Particular attention was paid to working capital in Mr Pascoe's Report. Mr Pascoe observed, correctly in my view, that "working capital is often used as a guide to a company's cash flow and solvency with a negative working capital an indicator that a company will be unable to pay its debts as and when they fall due". 73 The report contains a table summarising working capital in the period from June 2001 to January 2006. The table is as follows: Date Working Capital ($) 30 June 2001 (337,182) 30 June 2002 (15,100) 30 June 2003 351,900 30 June 2004 (135,422) 30 June 2005 (reconstructed) (497,014) 30 January 2006 (reconstructed) (2,755,450) 74 Three matters should be noted about this table. First, the June 2002 figure excludes any amount recoverable from loans to directors, which may have improved the result. Second, the June 2003 figure was obtained from the 2003 tax return, which did not disclose any debts owing to unsecured trade creditors. In my view there is a high probability that there was a substantial amount owing to trade creditors at June 2003 and so the true working capital position would have been very much worse than stated. Third, the June 2004 figure excludes any amount recoverable from loans to directors and Unitcorp. The circumstances surrounding loans to directors and Unitcorp respectively require further explanation. 3.2.4 Loans to and by Simon Khattar 75 In the financial statements for June 2005, there was a figure of $114,733.67 for "loans to directors", which represented loans claimed to be made to Simon Khattar. However in the non-current liabilities section, there were loans by Simon Khattar to the company in the sum of $330,621. Mr Pascoe took the position that both the current assets and the non-current liabilities should be removed, because that was the outcome achieved by agreement following the hearing before Hammerschlag J. He said in the notes to his reconstructed accounts: "Simon Khattar has advised that the Loan to Directors as disclosed in the financial accounts represents monies owing by him in his personal capacity. As a requirement of settlement at the Supreme Court Proofs of Debt proceedings, the Liquidator is unable to pursue Mr Khattar for these monies. Accordingly, values have been assessed to have a zero balance." 76 In final submissions, counsel for Mr Sims contended that either both figures should be treated as current assets/liabilities or as non-current assets/liabilities, and he suggested that the more appropriate treatment of the whole loan relationship between the Company and Simon Khattar would be to regard it as a longer term relationship than one year and therefore in the non-current category. Having brought both the asset and the liability into the non-current category, counsel submitted that they should be offset, leaving a net non-current liability (or negative non-current asset) of $215,888. I agree with this reasoning. 3.2.5 Unitcorp 77 The current assets in the 30 June 2005 balance sheet included a loan to Unitcorp of $534,246.86. The sole director of Unitcorp is Simon Khattar, and yet there is only limited evidence about the financial position of that company. It owned the property at 2-8 Kitchener Avenue upon which construction work was undertaken by the Company, though the work had not been completed as at 30 January 2006. The building contract is not in evidence, though Mr Khattar gave evidence that a building contract exists. The defendants tendered a valuation of that property, prepared by Knight Frank as at 30 November 2005 for an intending mortgagee, which gave it a current market value of $7.91 million. Other evidence indicates that Unitcorp was offered a loan facility to provide construction finance of $4,871,500 by St George Bank on 28 November 2003, subject to guarantees from the three Khattar brothers, Compass Plumbing Services and the Company. St George Bank submitted a proof of debt to Mr Sims on 27 February 2007 for $371,602.62, claiming on the Company's guarantee of the Bank's loan to Unitcorp. The proof of debt claims a gross amount of $4,771,607.62, less what appears to be an estimate of realisation of the Bank's security over 2-8 Kitchener Avenue, in the sum of $4,400,000. 78 In his reconstructed accounts, Mr Pascoe excluded the Unitcorp debt from the Company's current assets. He said in the notes to the reconstructed accounts: "The Liquidator's investigations have revealed that no monies are likely to be recovered from Unitcorp Pty Ltd, related entity. Accordingly values have been assessed to have zero balance." 79 The defendants claimed that the debt should be treated as a real current asset and a substantial source of liquidity. I do not accept the defendants' submission. In my view the fact that St George Bank has lodged a proof of debt against a guarantor of Unitcorp's borrowing is a firm indication that at the date of the proof of debt, Unitcorp was in substantial financial difficulty. It is significant that in the proof of debt, the Bank anticipated that there would be a shortfall on realisation of its security over 2-8 Kitchener Ave. If Unitcorp, apparently a property development company, was in such a parlous position at the date of lodgement of the Bank's proof of debt in February 2007, it is likely that the company's difficulties arose somewhat earlier. At the date of the order for the winding up of the Company (30 January 2006), the building project on Unitcorp's land had not been completed. These facts suggest that the difficulty may have begun earlier than January 2006, and in my view they raise question as to whether Unitcorp would have been able to provide liquidity to SSET Corporation in June 2005. 80 If Unitcorp's land had a value of $7.91 million in November 2005 then I accept it would have had a value of not much less than that on 30 June 2005. But, after allowing for the lower prices generally achieved by mortgagee sale and the weakening economic circumstances in 2007, there must be some doubt about that valuation in view of the Bank's estimate of realisation of $4.4 million. Further, the level of borrowings (including any borrowing on second mortgage) and secured over the property as at 30 June 2005 is not revealed, and if the offer of construction finance made by St George Bank in 2003 was taken up, there may have been very little remaining equity against which further borrowings could be made in June 2005. The evidence is left in an unclear state, in circumstances where it was open to the defendants to adduce evidence of Unitcorp's financial condition, and they did not do so in accordance with the timetables that were set. 81 The defendants submitted that Mr Pascoe gave no consideration to the existence of the Company's contractual claims against Unitcorp arising in respect of the construction of 2-8 Kitchener Avenue. A problem with this submission is that the contract between the Company and Unitcorp has not been located, although Simon Khattar gave evidence that such a contract exists. The defendants complain that the liquidator made no attempt to subpoena St George Bank to obtain a copy of the contract. But I am not persuaded that issuing such a subpoena was a necessary step for the liquidator to take, or that any substantial current asset would thereby have been uncovered. After Mr Pascoe's Report were served on the defendants, it was open to them to serve evidence to demonstrate the financial strength of Unitcorp, and yet they have not done so notwithstanding several directions by judicial officers of this Court giving them the opportunity to do so by a stated deadline. For the reasons that have led me to conclude that Mr Pascoe was justified in excluding the loan to Unitcorp from current assets, I think he was justified in excluding any contract claims against Unitcorp as well. 82 Counsel for the defendants submitted that there was some inconsistency involved in Mr Pascoe recognising as current liabilities trade creditors of $499,340.47 without providing for a current asset comprising claims by the Company against Unitcorp in respect of those liabilities. When this was put to Mr Pascoe he agreed that the absence of Unitcorp as a debtor in relation to contract claims was a "major limitation" on his Report. But he went on to say that he made inquiries with Unitcorp to seek to recover any outstanding debt. That suggests an explanation for the absence of any current asset reflecting claims by the Company against Unitcorp, the explanation being that no foundation in fact for such a claim has been identified. 83 Cross-examination of Mr Pascoe by counsel for the defendants pressed the idea that if there are nearly $500,000 worth of trade creditors of a builder, there would likely be claims against the owner of an equivalent order for the recovery of that money. But in the absence of any factual basis, and given that the owner and builder in this case are related entities, Mr Pascoe has not included any such current asset and there is no foundation for the Court to do so. In any event, as with the loan, there would be an issue as to the prospect of recovery of any such claim having regard to the financial condition of Unitcorp. 3.2.6 Adjustments to the reconstructed financial statements at 30 June 2005 84 Disregarding loans to directors and loans to Unitcorp, and without adjusting trade creditors to add in the pre-June 2005 trade creditors who were paid in the July 2005-January 2006 period, Mr Pascoe calculated working capital as at 30 June 2005 at ($497,014) in the reconstructed accounts set out in his Report. If Mr Pascoe's reconstruction were adjusted so that: (i) the loans to and by Simon Khattar were offset, rather than disregarded, so as to produce a negative current asset of $215,888; and (ii) the debt owing by Unitcorp in the sum of $534,246.86 were included, as advocated by the defendants but contrary to Mr Pascoe's view; and (iii) the whole the Company's creditor payments in July and August ($427,289.68) were treated as payments of pre-30 June debts; then the working capital deficiency would be ($535,951). 85 If adjustments (i) and (iii) were made, but the Unitcorp debt were excluded, the working capital deficiency would be ($1,070,000). If the loans to Simon Khattar were excluded rather than offset, and the Unitcorp debt were excluded as well, but adjustment (iii) were made, the working capital would be ($320,063). 86 Counsel for the defendants was critical of Mr Pascoe for excluding from current assets a progress payment in the sum of about $319,000 made to Hala Constructions Pty Ltd in respect of 7-11 Kitchener Avenue, which remained unpaid on 30 June 2005. Mr Pascoe's explanation, in the notes to the reconstructed accounts, was as follows: "Sundry debtors have been disclosed as being $319,918, representing monies owing by Hala Constructions Pty Ltd ('Hala') for work performed at 7-11 Kitchener Avenue, Regions Park. Hala dispute the amount owing. Advice from Liquidator's solicitor notes that amounts are not likely to be recovered. As such value has been assessed as zero for both 30 June 2005 and 30 June 2006." 87 There is evidence, considered below, of a dispute between the Company and Hala Constructions, that had led the Company to stop work on the site. The correspondence that is in evidence suggests it had become improbable that this claim would be met in the near future or at all. 88 Counsel for the defendants also made some criticisms of Mr Pascoe's treatment of certain non-current assets, including in particular the Company's land. Mr Pascoe included only the written down book/cost value of the Company's real property, in a total amount of $954,061.44 as at 30 June 2005. The defendants allege that the market value of the properties amounted in total to $2,152,000. It seems to me unnecessary to resolve the point because it is not suggested that the property holdings contributed to the Company's ability to pay its debts as and when they fell due. Critical submissions were made in respect of other non-current assets, but in my view the issues raised by those submissions do not bear on the question solvency. 89 In my opinion Mr Pascoe's calculations, if accepted without adjustment, or adjusted by items (i) and (iii) or by item (iii) above, amount to a compelling case that the Company was insolvent as at 30 June 2005, even if the debts said to be payable by Unitcorp and Simon Khattar were to be included in current assets. For reasons I have given, my view is that the Unitcorp debt should be excluded and the loans to and by Simon Khattar should be offset to produce a net non-current liability. Further, the Company had a high level of unsecured creditors due and overdue, and no obvious means of discharging all debts in a timely fashion, even if repayment of the Unitcorp debt could be arranged. Consequently, my view is that the liquidator has proved that, quite apart from the presumption of insolvency, the Company was in fact insolvent on 30 June 2005. 4. Element (b) - reasonable grounds for suspecting that the Company was insolvent 90 Under s 588G(1)(c), the Court must be satisfied that there are reasonable grounds for suspecting that the company is insolvent (or would become insolvent by incurring the debt) at the time when the company incurs each debt. Mr Sims points to the following items of evidence to show that there were reasonable grounds for suspecting that the Company was insolvent at 30 June 2005: (a) Dhilas Excavation & Demolition Pty Ltd rendered invoices to the Company for the work that it did over a period of about one year to October 2005, so that as at 30 June 2005, the total amount that had been billed was $163,909.96, for which it had received payments totalling $100,000 made in rounded amounts not specifically related to the amount of the invoices rendered; in the result, at 30 June 2005 Dhilas was owed $63,909.96, of which $48,884.06 had been invoiced more than eight months earlier; (b) Concrite Pty Ltd rendered invoices for its work between 23 December 2004 and 16 March 2005, which by 30 June 2005 had been outstanding for more than 180 days in the amount of $22,525.67, with no payment received; (c) Exact Concrete rendered invoices requiring payment strictly within 7 days, but as at 30 June 2005, $5,840 had been outstanding for over 90 days; (d) as noted earlier, on 12 May 2005 the Consumer Trader & Tenancy Tribunal ordered the Company to pay the Owners Corporation $152,912.10 on or before 14 June 2005, and at 30 June 2005 this amount remained outstanding; (e) Saba Tiling & Co Pty Ltd invoiced the Company for work from 11 November 2004 until May 2005, and as at 30 June 2005 an amount of $25,092.59 was outstanding, most of it in excess of 90 days, with no payment received; (f) the Company received State Government fines for offences including pollution, removing asbestos without a permit, and failing to clean up, with additional debt recovery and enforcement costs, so that by 30 June 2005 a total amount of $8,152.50 was due but unpaid. 91 Mr Sims submits that these are merely examples, and at tab 25 of Vol 4 of Ex SDP-1 there are said to be many more examples. As previously noted, he has prepared a Schedule of Debts Incurred, extracted from the evidence, which shows a total amount of $750,781.80 incurred to 30 June 2005. This includes some large amounts, such as $287,257.43 said to be due to a bricklayer called Sam Vella, and Vero Insurance's right of subrogation in respect of the Owners Corporation claim for $152,912.10. For reasons given earlier, my opinion is that the figure for debts incurred to 30 June 2005 is established by the evidence. 92 In my view a reasonable person looking at the current assets and working capital position as at 30 June 2005 discussed in 3.2.3 and 3.2.6, together with the evidence of outstanding trade creditors as at 30 June 2005 shown in the Schedule, and taking into account the ageing of that debt, and the fact that on many occasions the Company had made no payment at all to the creditor, would have a strong suspicion that the company was unable to pay its debts as and when they became due and payable. Therefore this ingredient of liability has been established for debts incurred after 30 June 2005. 93 I have not made a finding that the company was insolvent earlier than 30 June 2005, but there is a presumption of insolvency as from the beginning of May 2005 because of the failure to retain financial records from that time until the making of the winding up order. However, the evidence does not focus on the beginning of May 2005 in a manner that would enable me to make a finding that there were reasonable grounds to suspect insolvency at that time. In the result, element (b) has been shown to be present at 30 June 2005 but not earlier. 5. Element (c) - whether the defendants were aware, or a reasonable person in the position of the defendants would be aware, of grounds for suspecting insolvency 94 Section 588G(2) says that by failing to prevent the company from incurring the debt, a person contravenes s 588G if: (a) the person is aware at that time that there are such grounds for so suspecting; or (b) a reasonable person in a like position in a company in the company's circumstances would be so aware. 95 Mr Sims places principal reliance on s 588G(2)(b), although he also contends that subparagraph (a) is applicable in the present case. 96 Subparagraph (b) is probably satisfied simply on the basis that the three defendants were directors of the Company, and reasonable persons in the position of directors would be quite closely aware, in a company of the size of SSET, of the company's working capital position, its sources of liquidity, the amount owing to creditors at the end of the financial year, and the ageing of that debt. Awareness of those matters, as at 30 June 2005, would amount to being aware that there were reasonable grounds for suspecting insolvency. 97 Counsel for Mr Sims referred in final submissions to two additional matters. First, there is evidence that by 30 June 2005 the Company had fallen out with the owner of 7-12 Kitchener Avenue, Regents Park. That property was owned by Hala Constructions Pty Ltd, a company connected with Ibrahim and Hala Alameddine. By 20 January 2005 it is likely that all of the directors knew that Hala Constructions had refused to pay. On that date Simon Khattar wrote on behalf of the Company to the Alameddines saying that the Company would stop work on the project until payment of its outstanding progress payment and had been received, and subsequently worked stopped on the job. The amount of the progress payment, dated 17 December 2004, was $319,000. On 24 June 2005 Simon Khattar again wrote to the Alameddines complaining about the outstanding progress payment and demanding that they not carry out work themselves on the site. 98 It appears from the management accounts that the cost of construction of the three Kitchener Ave projects, which were being built approximately in parallel, was divided up between the properties. The second matter referred to by counsel for Mr Sims in final submissions was that at the date of the winding up order, the Company had still not finished its work on 2-8 Kitchener Avenue, the project undertaken for Unitcorp. 99 Counsel for Mr Sims submitted that these two additional matters reinforce the conclusion that the Court should draw from the list of aged creditors as at 30 June 2005, namely that a reasonable person in the position of a director of a company in the Company's circumstances would have been aware, at the time of incurring debts after that date, that there were reasonable grounds for suspecting insolvency. The unresolved dispute with Hala Constructions affected the Company's cash flow, and at 30 June there must have been some uncertainty as to whether the outstanding amount that had been demanded would be received. The fact that 2-8 Kitchener Avenue was uncompleted at 30 June 2005 implied that the residential units in that development could not be sold off so as to generate cash. I agree with these submissions. 100 Additionally by 30 June 2005 Company had defaulted and failed to comply with the order of the Consumer Trader & Tenancy Tribunal made on 12 May 2005 for payment of $152,9120.10 by 14 June 2005. Counsel for Mr Sims described the position as at late June 2005 in this way, in final written submissions: "Trade creditors were engaged to supply labour and materials for the related party Kitchener Avenue work. Concreters came and went after being left unpaid. Fencers, equipment hirers, labourers, air-conditioning installers, scaffolders, tilers, a roofer and a certifier were unpaid. In this way debts of over $750,000 were incurred to trade creditors when the new financial year began on 1 July 2005." 101 The three directors of the Company were closely involved in activities that would have led them to be aware of these matters. Tony was site supervisor, Edmond was project manager, and Simon was in charge of finance and administration. These were not non-executive directors. A reasonable person in a like position to each of the three defendants in a company in the Company's circumstances would have observed what was happening about non-payment of subcontractors, as well as the overall working capital position, and would have perceived that they amounted to reasonable grounds for suspecting insolvency. 102 That conclusion is enough to satisfy s 588G(2). In my opinion subparagraph (a) (the director is aware at the time when the debt was incurred that there were reasonable grounds for suspecting insolvency) is also satisfied in the case of Simon Khattar. He must have been actually aware of the state of outstanding creditors at 30 June 2005 and of the difficulties the Company was encountering in sustaining cash inflow. The letter to the Alameddines of 24 June 2005 indicates that Tony and Edmond Khattar had actual knowledge of that dispute, because it appears from that letter that they met with the Alameddines in June 2005. But I am not able to conclude, of the evidence, that they were actually aware of the creditor position in sufficient detail to support the conclusion that at 30 June 2005, they were aware that there were reasonable grounds to suspect insolvency. In their case liability depends upon my finding under subparagraph (b) only. 103 Counsel for the defendants submitted that Mr Pascoe's calculation of the Company's working capital position as at 30 June 2005, and, more generally, his reconstructed financial statements for that date, were prepared with the benefit of hindsight in that they took into account matters that the directors could not have known as at 30 June 2005. Thus, in deciding to disregard the loans to and from Simon Khattar, Mr Pascoe took account the settlement before Hammerschlag J that occurred some years later. In deciding not to treat the loan to Unitcorp as a current asset, he relied on inquiries made after the date of the winding up order. But in my opinion a reasonable person in the position of the directors of this Company in its circumstances would have observed that the overall deficiency of working capital at 30 June 2005 would have been very substantial, even if the Unitcorp loan were treated as a current asset (see the adjustments at 3.2.6 above, according to which working capital would have been ($535,951) taking into account the Unitcorp loan). 104 Such a reasonable person would have observed that a loan to Simon Khattar was proposed to be treated as a current asset while a greater amount of loans from Simon Khattar were to be treated as non-current liabilities, and would have queried that treatment and suggested an offsetting. In the absence of any persuasive rationale for treating the company's asset as a current asset and the company's liability as a non-current liability, the reasonable person would have opted for an offsetting and would have treated the net balance as a non-current liability (or as a negative current asset). By anticipating the settlement before Hammerschlag J, and hence disregarding both the current asset and the non-current liability for the purposes of the June 2005 accounts, Mr Pascoe achieved a result more favourable to the defendants than offsetting the loan amounts and treating the negative balance as a current liability. In any event, if the loan to Simon Khattar was treated as a current asset and there was no offsetting, and also the loan to Unitcorp was treated as a current asset, there would still be a significant deficiency in working capital at 30 June 2005, in the sum of ($320,063). 105 In summary, if all of the elements of hindsight were removed from the calculation of working capital as at 30 June 2005, so that the calculation could have been made by persons in the position of the directors with the knowledge available to them at that time, there would still be reasonable grounds to suspect the Company's insolvency at that date, and a reasonable person in the position of each director in a company in this Company's circumstances would have been aware of those reasonable grounds. 106 Were it necessary to deal with the defence in s 588H(2), I would find, for the reasons given under headings 4 and 5 of these reasons for judgment, the none of the defendants had reasonable grounds to expect that the Company was solvent at 30 June 2005 or any later time, and it has not been shown that any defendant expected that the company was solvent at that time or that it would remain solvent if it incurred debts. None of the defendants went into evidence as to their expectations. 6. When was each debt incurred? 107 The concept of incurring a debt seems at first blush to be straightforward, but it is in fact quite a complex idea (see Ford's Principles of Corporations Law, LexisNexis, looseleaf, at [20.090]). It is unnecessary to go into the complexities here. It is enough to say that: as a general principle, money becomes due and payable and a debt arises at the point of time identified in the contract; if the contract is for the supply of goods, in the absence of express provision a debt may arise only when the goods are delivered, but if the goods are specially manufactured to order, the obligation to pay may arise earlier, when the manufacturer's resources are committed to the task; where a debt is incurred by a builder through the engagement of a subcontractor for the performance of building work on site, the debt is usually incurred on a day-to-day basis when the work is performed; the debt that arises for goods supplied by the subcontractor in the performance of his work is usually incurred when the materials are used in that work. 108 Mr Sims' Schedule of Debts Incurred appears to me to reflect these principles. The Schedule was taken from tendered evidence. It asserts that: in the period up to 30 June 2005 the total debts incurred amounted to $750,781.80; in the period from 1 July 2005 to 8 August 2005 the total debts incurred amounted to $232,975.34; in the period from 9 August 2005 to 31 January 2006 the total debts incurred amounted to $330,846. 109 The Schedule speaks of debts incurred up to 31 January 2006, which was the day after the making of the winding up order. The Court needs to identify creditors whose debts were incurred up to the cessation of the of the Company's business upon the making of the winding up order on 30 January 2006. Strictly any debts incurred on 31 January 2006 may need to be disregarded. In my opinion, however, it is more likely than not that none of the debts listed in the column of the Schedule headed "Debts incurred 9/8/05 to 31/1/06" was incurred on 31 January 2006. There are only four creditors whose invoices are dated later than 30 January, and their invoices are all for goods or services necessarily provided during the course of the carrying on the Company's business: Bunnings (hardware suppliers); Caltex (for use of a Star Card); Hutchinson (for a telephone account); and Millar's Doors & Timber (presumably for building supplies). Although invoices may have been rendered after 30 January, it seems to me very likely that the debts were incurred no later than that day. 110 I have dealt with debts incurred up to 30 June 2005 at 3.2.2 above, where I accept the figures stated in the Schedule. 111 Having reviewed the evidence and submissions, I find that the Court should accept the evidence in the Schedule with respect to debts incurred on and after 1 July 2005. In his final written submissions (para 23), counsel for the defendants contended that some of the debts that were the subject of recovery claims were apparently incurred after liquidation. He listed 13 debts. I have reviewed counsel's criticisms by comparison with the Schedule of Debts Incurred, paying particular attention to whether any of the debts identified in the submission had been treated by the liquidator as debts incurred in the period from 1 July 2005 to 30 January 2006. Only one of the debts listed in para 23 of the submission is included in the Schedule as a debt incurred in the period beginning 1 July 2005. That is a claim by ASIC for statutory fees totalling $212, made on 20 January 2006, clearly before the winding up order was made, and so there is no substance to counsel's criticism in respect of this invoice. All of the other claims listed by counsel in para 23 have in fact not been treated as debts incurred in the period from 1 July 2005 to 30 January 2006, for the purpose of Mr Sims' recovery claim. 112 In the period from 1 July 2005 to 30 January 2006 the total amount of debts incurred was $563,821.34 (the sum of the last two columns in the Schedule). The figures for July 2005/January 2006 do not include the following large amounts: $371,607.62 claimed by St George Bank in respect of the Company's guarantee of the borrowing by Unitcorp; $152,912.10 claimed by Vero Insurance in respect of the Owners Corporation claim; the amount of $287,257.43 claimed by Sam Vella for bricklaying and rendering. 113 Since I am not satisfied that the ingredients of liability have been established in respect of any period earlier than 30 June 2005, it follows that the defendants' contraventions of s 588G(2) arose by failing to prevent the Company from incurring debts in the period from 1 July 2005 to 30 January 2006. The evidence summarised in the Schedule establishes that the amount of those debts is $563,821.34, that is $563,821 to the nearest dollar. I accept that evidence. 7. What loss or damage was suffered by each creditor? 114 The question posed by s 588M(1)(b) in respect of each creditor is whether the creditor has suffered loss or damage in relation to the debt because of the company's insolvency. In this case creditors whose debts were incurred on and after 1 July 2005, and whose debts remained unpaid at the time of the winding up order on 30 January 2006, suffered loss or damage because, the Company being insolvent, their debts remained unpaid except to the extent of the limited distribution that has been made and the further distribution that is anticipated. 115 The liquidator has paid an interim dividend to unsecured creditors of 5%, and has foreshadowed that an estimated further 5% dividend is to be paid. Therefore each identified creditor has suffered loss or damage to the extent of 90% of their respective debts. The debts in question are those incurred from 1 July 2005 as per the Schedule, in the total amount of $563,821. The creditors' loss or damage is, to the nearest dollar, $507,439. According to s 588M(2), an amount equal to the amount of the creditors' loss or damage is recoverable from the contravening directors as a debt due to their company. 8. Conclusions 116 Mr Sims has made out his case against each defendant under ss 588G(2) and 588M(2), in respect of debts amounting to $563,821. He has established his entitlement as liquidator of the Company to recover from each defendant the amount of loss or damage suffered by the creditors in respect of those debts, namely $507,439. The defendants are liable for that amount jointly and severally. 117 I shall therefore make the following declarations and orders: 1. Declaration that each defendant contravened s 588G(2) of the Corporations Act 2001 (Cth) by failing to prevent the Company from incurring debts in the sum of $563,821 in the period from 1 July 2005 to 30 January 2006. 2. Declaration pursuant to s 588M(2) of the Corporations Act that the first plaintiff is entitled to recover from each defendant, as a debt due to the Company, the loss or damage suffered by the creditors whose debts are referred to in Order 1, being the amount of the debts less any gross recovery of assets of the Company but without regard to any statutory recoveries that he has made, and that the defendants are jointly and severally liable to pay the amount so calculated. 3. Order the defendants to pay the first plaintiff the amount calculated in accordance with Order 2, namely $507,439. 118 Mr Sims has not recovered the full amount claimed in his amended originating process, but he has succeeded in establishing his entitlement to substantial recovery, in his capacity as liquidator of the Company. In those circumstances the defendants should be ordered to pay the plaintiffs' costs of the proceedings, as agreed or assessed. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.